2022, the First Five Months

Whilst 2020 and 2021 were challenging, no one really expected 2022 to open with Russia invading the Ukraine and causing a new human crisis of unbelievable scale. Our hearts go out to those who are experiencing so much suffering and displacement. We must realise also, the suffering of many people in the world not gaining the same levels of news coverage.

We knew post-pandemic inflation and interest rates would rise to new levels. We didn’t expect a Russian Ukraine war to add to the economic challenge at such a scale and further influence rising prices and scarcity of energy and food products.

Russia’s invasion of the Ukraine was also followed by its stock market closure, withdrawal and stopping of funds to one of the largest countries in the world.

In March one of our investment partners, Dimensional announced it had removed Russia from its list of approved markets for investment. It planned to divest all Russian holdings from its portfolios as market conditions allowed. On 28 February 2022, Russian equities represented from 0.09% to 0.44% of the Dimensional emerging market strategies, compared to 1.59% in the global MSCI Emerging Market Index.

The diversified and systematic nature of Dimensional’s portfolios gives them flexibility. Rather than waiting for index providers to change the index, they can cease trading in one market and continue trading across many other eligible countries.

Such disruption is not new

  • In 2020 and 2021, the US issued executive orders that prohibited US persons from investing in certain Chinese companies.
  • In 2019, the Tokyo Stock Exchange closed for 10 days after Japanese Emperor Akihito abdicated the Chrysanthemum Throne.
  • 27 June – 3 August 2015, Greece closed its stock market after defaulting on its government debt.
  • 27 January 2011, during the Egyptian revolution of 2011, the Egyptian Stock Exchange closed for over a month.
  • In 2006, a coup d’état in Thailand led to a market closure in 2006.
  • In September 2001, the New York Stock Exchange closed for a week after attacks on the World Trade Centre.
  • In 1999, capital controls were introduced in Argentina in 1999.
  • In 1997,  there were currency repatriation restrictions in Malaysia.

Taking the long run view

History continues to demonstrate there is no need to worry about a large economic shock. It serves to reinforce the importance of accepting we invest for the long term.

While it may be unnerving to see the value of your investments drop, the key question to ask is whether it affects you in your day to day life. If the answer is no, it is best to sit tight and wait for a recovery. For those who are living off of their investments, adequate cash reserves should be held to draw upon in adverse market conditions.

Whilst some geopolitical events cause extreme human suffering, the effect on our investments is normally short lived. Despite all the uncertainty and turmoil, BpH Client Portfolios have performed well due to the favouring of undervalued companies successfully reducing the volatility.

From the beginning of the year the MSCI World Equity index, which is dominated by US tech stocks, is down by -13.99%, but MSCI World value down just -3.36%. 

Our Moderate 60 portfolio has lost -6% from 1 January 2022 to 25 May 2022 but over the last 12 months is up 0.88%. Source: FE Analytics, all end dates to 25 May 2022.

This set of charts shows that even if the market continues to fall, it is not necessarily a reason to worry. Using US Markets as an example, Dimensional data shows that even after serious crashes of 30%, US equities have, on average, returned over 50% over just five years.

Investment belief: Global Diversification

While the US Market makes up 60% of total equities by value, another of our core investment beliefs is that diversifying investments across the globe will reduce volatility over the long run. Global diversification has been shown to improve the risk-adjusted returns of a portfolio, as one market floundering will be offset by others that are doing better.

While it is impossible to predict and avoid the effects of global events, global diversification, along with a suitable asset allocation, weighting towards undervalued companies and keeping an appropriate level of cash can help to mitigate the risks of adverse market conditions affecting your life or your financial future.

This article was produced for educational purposes and aimed at UK residents. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

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